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Should Major Buy Sides Slim Down?

In a long-anticipated move, Credit Suisse was the latest investment bank to announce major cutbacks this week. Tim ponders whether certain fund management giants — especially running mutual funds — should be thinking the same way.

Time to pay the piper ...

Timothy Bourgaize Murray

26 Oct 2015

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Last week, in a long-anticipated move, Credit Suisse was the latest investment bank to announce major cutbacks. Tim ponders whether certain fund management giants — especially those running mutual funds and ETFs — should be thinking the same way.

While it's been fairly under-reported, since the financial crisis almost every major investment bank has seen some kind of years-long rationalization program initiated. In many cases, thousands or even tens of thousands of jobs have been eliminated over time.

For most of the firms rescued after 2008 — particularly in Europe — the writing was on the wall: as a condition of your bailout package you're going to change your business model, or cease doing business altogether.

On a regulatory level, the result was a new set of capital requirements and buffers that have effectively made it impossible to engage in certain kinds of lending and trading activities. Or at least that's the intended goal.

Credit Suisse, by announcing its own plan last week to move out of a number of markets and investment banking activities while reducing staff, was only the latest among its tier-one brethren to acknowledge this reality.

Who's Next

Even if it's right for the company, for shareholders and most importantly, for clients, there is never a good day to announce big job cuts or the shutting of major trading desks. The key is to do it on your own terms, quietly and with a plan, before it becomes time to pay the piper. And often that is sooner, not later. Just ask the banks.

But what about the buy side? A select group of firms — market makers, hedge funds, and alternatives houses — are filling some of the voids the banks have left. Other fund management giants, by virtue of their size, have attracted the status of being 'systemically important', even if much of their business is in lower-risk activities like operating mutual funds or exchange-traded instruments, both of which (though especially ETFs) are flourishing in the buoyant equities markets of recent years.

Perhaps it seems a strange time then to say, 'well, some of these shops should take a cue from the sell side and begin slimming down.' But maybe it's not.

It's been fairly clear that the buy side would get its regulatory treatment just as the banks did ... just later on, and somewhat less prescriptively. As they've taken on more of an active role in many markets, and continued to add assets under management and advisory, that's now happening. Everything from '40 Act funds to money managers to liquid alts and complex ETPs are now getting greater scrutiny. It was just a matter of time.

Meanwhile, heightened US liquidity requirements for ETFs and mutual funds — the last real frontier, given their stalwart (if not unfailingly sterling) status in the industry — were published and opened for further public comment in September.

Much like the capital restraints and leverage ratios for the banks, these could have a major effect on the way the largest investment managers in the world operate, and in the very least will force them to keep very close track of asset valuation and obligations at any given time across their book.

It could certainly also curtail some of the more exotic concoctions they've recently been packaging into traditional-looking fund wrappers, which have raised some suitability and risk-reporting worries on their own. We shall see.

The major shops could see this coming, and with many also anticipating a market adjustment and lower fee income, they have been trying desperately — using analytics and other tech platforms — to get their heads around measuring headcount performance against revenues, streamlining sales and ops across different regions, and building out the new reporting they're inevitably going to need.

This is no mere exercise and it hasn't been easy, in part because at the end of the day, if it works correctly, greater processing automation and leaner operations will be at hand ... and rationalization too.

With respect to such a transformation process, over the years I've anecdotally heard this sentiment from CTOs again and again: We should've done this sooner.

It's cheaper, easier, and is more likely to get done right when you're well ahead of new requirements, rather than under the gun or trying to reduce bloat.

While most asset managers don't have the sprawling tech estate and personnel of a major investment bank, the pain of new rules — and of generally getting too large — is usually just as significant relative to their size. And of course, for the BlackRocks and Vanguards of the world, they're not so far off the banks, anyway.

Even if it's right for the company, for its shareholders and most importantly, for clients, there is never a good day to announce big job cuts or the shutting of major trading desks. The key is to slim down on your own terms, quietly and with a plan, before it becomes time to pay the piper.